If there are words to characterize the precious metals markets for July, it would be “divergences” and “shortages.” There was heavy selling in the leveraged futures market and extraordinary buying demand and shortages in physical coins, rounds, and bars.
Despite turmoil surrounding Greece and a huge sell-off in Chinese equities, traders dumped wheelbarrow loads of paper gold and silver. The expected safe-haven buying was concentrated entirely in physical bullion. Spot prices fell relentlessly during the month.
We’ve reported on this divergence recently, and so did Frank Holmes of U.S. Global Investors during last Friday’s Money Metals podcast. But some surprising new data has come to light…
In silver futures, the number of contracts where holders opted to take delivery of the bars rather than “roll” their contracts over, or close the position and take cash, jumped unexpectedly and dramatically in July.
TF Metals Report watches deliveries carefully, and its researchers pointed out some unprecedented occurrences in July. In a typical month, 80 to 85% of contracts still open at expiration wind up in physical delivery of the bars. In July, this number was 135%.
One or more major players “jumped the queue” and took delivery of about 6.5 million more ounces of silver out of COMEX warehouses than anticipated at the beginning of the month.
This drawdown activity was masked completely by what happened to prices. Precious metals bulls are frustrated by the complete detachment between spot prices and physical demand. They’re wondering how that is even possible.
The answer is that as long as only a tiny and manageable number of participants in futures markets for gold and silver actually demand delivery, spot prices can move independently of the fundamentals.
The July data on physical deliveries may be foretelling a change. The pitifully thin inventory of bars held in exchange vaults that back the enormous volumes of paper futures being traded daily may start to matter… and matter a great deal.
If the numbers of contracts where investors stand for delivery get unmanageable, we’ll see the massive leverage built into gold and silver futures start to work in favor of precious metals spot prices rather than against them.
The July data should send a shiver down the spine of anyone with a naked short position on silver, i.e. anyone who doesn’t have physical silver to deliver if a counter-party demands it. Short sellers are counting on being able to settle in cash – or grab silver bars from exchange vaults if necessary.
Mints Scouring America for Raw Silver
The big spike in investment coins, rounds, and bars is almost certainly behind the unusual delivery activity at COMEX warehouses.
Our sources indicate mint and refinery demand is largely responsible for this “jumping [of] the queue” and offtake of 1,000-ounce bars. The silver is needed for manufacturing into smaller retail products currently in very short supply.
Some major precious metals depots around the country, such as those in Los Angeles, completely ran out of all forms of pure silver last week, and mint owners are scouring the country to lock up the silver they need to keep production running.
The scenario is deeply frustrating for mints that should be having a heyday in this period of high demand.
However, if mints can’t readily get their hands on the raw silver needed for production to run at full tilt, orders could get backed up for weeks or even months.
The retail and wholesale market for silver is tight as a drum and shows no signs of loosening. Another spike in demand may clean it out completely.
Clint Siegner is a Director at Money Metals Exchange, the national precious metals company named 2015 "Dealer of the Year" in the United States by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals' brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.
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